GST would have an impact on the pricing, working capital, contracts with vendors and customers, ERP systems, processes, internal control and accounting. Another important GST impact on Pharma companies would be the opportunity to review the supply chain and move to a supply chain based on business parameters. Thus, GST would impact every aspect of the business.

Post GST, Pharmaceutical industry’s traditional cost and distribution model will get replaced by supply chain efficiencies. The central tax subsumed under GST and interstate transactions between two dealers will become tax neutral. This will lead to a decrease in cost which can be added to margins.

GST will also have a positive effect on warehousing strategy. There are many of the pharmaceutical companies maintaining their warehouses in different states in order to avoid Central Sales Tax (CST) of different states. Post GST, manufacturers can set their warehouses at their strategic locations and consolidation of warehouses will take place across the sector.

Currently, pharma manufacturers get raw materials either from different states or are being imported. For other countries, a manufacturer has to pay import duty and for different states, he has to pay CST on rates levied by individual states. Once GST is introduced, it will reduce the manufacturing cost of Indian pharma industry. This will have cascading effect providing a great opportunity for optimising supply chain and distribution strategy. GST will decrease transportation cycle time, spur supply chain decisions, pave the way for the consolidation of warehouses which could help pharma supply chain reach its highest peak.

Action points for Pharma Sector

Analyse the impact of GST on business operations such as the extent of costs savings in procurements, review procurement contracts, analyse the impact of free supplies, discount schemes, product pricing, and the overall financial impact of GST.

Review the impact of Place of Supply provisions on procurement and distribution, and ascertain the extent of credit utilisation and blockage, if any.

Review the procurement and distribution model and evaluate options to move to an efficient supply chain.

Changes in the mechanism of utilisation of Input Tax Credit will require effective vendor management. Businesses will need to ensure that their vendors are compliant, by applying appropriate commercial safeguards such as a release of payment only after the vendor has uploaded the invoice on the GSTN or the possibility of vendor consolidations.

Review arrangements with group companies and the impact on valuation for inter-group transactions.

Review the impact of GST on business processes and ERP systems, and prepare a high-level transition plan.

Ensure that Input Tax Credits are duly reported on a regular basis in the relevant returns so as to eliminate loss of credit on the transition to GST.

The industry needs to commence preparation for a transition to GST as the Government makes progress on critical milestones in the coming months, such as the passage of the Constitutional Amendment Bill in the Rajya Sabha. GST transition is not just a transition of tax; it impacts every aspect of the business operations and therefore it requires a ‘whole of business’ approach to ensure a smooth transition.

Negative Impact on Pharma Industry

The medicines which are taxed at 5 percent in some of the states will witness increment of another 13 per cent. In addition, it will impact free drug samples, bonus schemes and the expired material return system followed by companies from the sector. Overall on the Pharmaceutical sector impact will be neutralised.

GST will impact bonus schemes, free drug samples and Reverse Logistics (expired material return) system and companies also will have to rethink incentives. Currently, medicines are taxed at 5 percent in some states but the introduction of GST will result in an increase in taxation to 12 per cent which will lead to a higher price for end consumers. Also, there are exemptions for some APIs (active pharma ingredients) from excise duty. It needs to keep tax free under GST for companies to maintain their prices at optimal levels.

Quotes from Experts

The Industry would also be looking forward to a beneficial tax treatment for goods manufactured in tax-free zones such as Baddi, a simpler valuation mechanism for levy of GST on stock transfer and zero rating in case of free supplies such as physician samples. “The overall tax impact could also depend on the locations where these companies manufacture their products, as it is not yet clear whether the tax waivers given by states such as Himachal Pradesh and Uttarakhand will continue in the GST regime thereby impacting the costing.

Suresh Nair, Partner, Indirect Tax, EY

With the GST regime coming in, healthcare services, which are currently exempt from output taxes, may continue to be exempt from GST given the importance of this sector. However, this could lead to a cost of such services going up due to increasing procurement costs of goods and services on account of increase in overall GST rates. On the other hand, pharma companies could expect some positives from GST on account of seamless flow ?of tax credits and streamline of overall compliance framework. However, it would need to be seen what treatment is accorded to existing indirect tax exemptions/ concessions and inverted tax structures that are prevalent in the existing framework to ensure that the overall costs of pharma products do not increase on account of GST.